Damodaran on Valuation

12.5. CONCLUSION

There are two clear points on which there is wide agreement. Intangible assets are a significant component of the global economy and of the values of many publicly traded firms, and accountants do not do a very good job of assessing the value of these assets. In this chapter, we turned our attention to how we can best estimate the value of intangible assets.

The first and easiest group of assets to value are intangible assets that are linked to a single product or service and are generating cash flows. Simple examples of these would be trademarks and copyrights, and they can be valued using conventional discounted cash flow models, with cash flows estimated from the product or service over a finite life.

The second group of intangible assets is more complicated because these assets generate cash flows to a firm rather than to a specific product, and their benefits accrue more widely. A classic example is a brand name, which can affect the sales of multiple product lines as well as the cost of capital for a firm. We presented a number of different ways of assessing brand name value, but a cautionary note is that brand name becomes difficult to value when it is entangled with other competitive advantages.

The final group of intangible assets includes those that do not generate cash flows right now but have the potential to create cash flows in the future, under the right circumstances. In this group, we include not only undeveloped patents and natural resource reserves ...